Subscribe To

Wednesday, 5 July 2017

Peak Oil news - 04/04/2017

As
the U.S. and Global Oil and Gas Industry continues to cannibalize
itself to stay alive, the Shale Dominoes begin to fall as BHP
Chairman announced its shale investment was a MISTAKE. Yes,
it’s true, BHP Chairman Jacques Nassar said his company’s $20
billion shale investment six years ago, in hindsight, was a mistake.

BHP
entered the shale business at the height of the fracking boom in 2011
and invested billions more developing the operations. The
fall in oil prices since then has led to pre-tax writedowns of about
$13 billion on the business.
Activist shareholder and hedge fund Elliott Management, holding 4.1
percent of BHP’s London-listed shares, has been trying to gain
support from other shareholders to persuade BHP to sell the shale oil
and gas business.

“If
you had to turn the clock back, and if we knew what we knew today, we
wouldn’t do it, of course we wouldn’t do it, but go back and put
yourself in our position at that time,” Nasser told a business
seminar, referring to the shale purchase.

“We
bought exactly what we thought we were buying, but the timing was way
off.”

While
BHP Chairman Nassar stated that “the timing was way off” in its
shale investment purchases, I really don’t think it was prudent “AT
ANY TIME” to invest in shale oil and gas. BHP Billiton is
making the case that they knew exactly what they were getting into,
but they paid too much for their shale investments.

As
the article states, BHP Billiton has written off $13 billion of their
shale oil and gas investments. Assuming they purchased $20
billion in shale energy assets, they have written off 65% of their
investment.
This is a big deal because BHP Billiton is the second largest mining
company in the world.

I
was writing back at the time of BHP Billiton’s shale purchases that
the company was making a BIG ERROR in judgement. However, with
the oil price above $100 a barrel from 2011 to 2014, the market
believed that shale was going to be the next best thing since sliced
bread. Unfortunately, the U.S. shale oil and gas industry has
been a dismal failure…. that is, if we consider it as a financial
venture.

As
I have posted in several articles, here is a table of the top U.S.
shale oil and gas producers operating cash flow surplus-deficits
since 2005:

Again,
you will notice that up until 2008, the industry enjoyed an operating
cash SURPLUS. However, since 2009, the top U.S. shale oil and
gas producers have suffered an operating cash DEFICIT… and it even
was worse from 2011-2014, when the oil price was over $100. So,
it really didn’t matter WHEN BHP Billiton purchased its shale
energy assets…. they were going to be LOSERS, regardless.

Now,
if we go back to 2011, when BHP Billiton started purchasing its shale
energy assets, we can clearly see how overly optimistic and wrong
they were about the industry. In the Financial Times
article,BHP
in $4.7bn US shale gas assets deal:

BHP
Billiton has moved to bulk up its energy holdings, entering the US
shale market with a deal to buy Chesapeake Energy’s Arkansas-based
gas business for $4.75bn.

The
Anglo-Australian miner said on Monday that it would buy 487,000 acres
of leasehold gas properties in the Fayetteville shale, funding the
deal from its existing cash balances.

The
assets, which currently produce about 400m cubic feet of gas per day,
will increase BHP’s oil and gas reserves from current levels by
about 45 per cent. The
company sees potential to triple the production from the Fayetteville
acreage during its 40-year operating lifetime.

BHP
Billiton purchased Cheasapeake Energy’s Fayetteville Shale Gas
assets in Arkansas for nearly $5 billion with the hopes of tripling
its production over the 40-year operating lifetime. I find this
quite amusing because most shale gas fields will peak within 5-8
years:

The
Barnett Shale in Texas was the first large shale gas field exploited
in the United States. While initial production began in the
early 2000’s, it really didn’t start to take off until 2005.
However, production peaked in the Barnett at 5.2 billion cubic
feet per day (Bcf/day) in November 2011. This
chart is a bit dated, but according to the most recent figures,
production at the Barnett is down to only 2.8 Bcf/day…. a 46%
decline from peak.

So,
what does this tell us?? It shows us that U.S. shale oil and
gas fields do not have a long lifespan. Which means, BHP’s
statement that they planned on tripling shale gas production in the
Fayetteville, was simply a delusion.

In
looking at BHP Billiton’s actual petroleum production figures, we
can plainly see that they totally overestimated their forecast for
shale gas production in the Fayetteville:

BHP’s
Shale gas production in the Fayetteville declined from 153 Bcf (per
year) in 2014, to an estimated 96 Bcf in June 2017. That’s a
37% decline in three years...
no where close to their forecast of a tripling of production.
And it wasn’t just BHP Billiton that suffered declining shale gas
production in the Fayetteville…. it was also the entire industry.

NOTE:
BHP Billiton did not break down its individual U.S. gas production
until 2014. So, the data for the Fayetteville only was
available from 2014 onwards.

Also, the figures for BHP’s
Fayetteville shale gas production are for the entire year.
Thus, it produced a total of 153 billion cubic feet of shale gas in
the Fayetteville in 2014. This turns out to be about 0.41 Bcf
per day.

Total
shale gas production in the Fayetteville peaked at 2.9 Bcf/day in
November 2012 and is currently producing 1.7 Bcf/day:

As
we can see, shale gas production started to take off in 2006, but
peaked just five years later in 2011. Thus, Fayetteville Shale
gas production is already down 41% from its peak six years ago.

Now,
this is only one example of the several shale energy assets that BHP
Billiton has on its balance sheet. It also has U.S. shale
assets in the Haynesville, Eagle Ford and Permian. For
example, BHP’s Eagle Ford oil production is estimated to be down
50% from its peak in 2015:

BHP’s
Eagle Ford crude and condensate production peaked in 2015 at 35,823
Mboe, or 35.8 million barrels of oil equivalent and is estimated to
be down to 17.8 million barrels in 2017. BHP’s
financial year for 2017 ends on June 30h.

As
we can see, BHP’s Haynesville shale gas production is down even
more than its Fayetteville production. According to my estimate
of BHP’s Haynesville shale gas production of 99 Bcf (billion cubic
feet) in 2017, it is down 46% from the 183 Bcf produced in 2014.

The
evidence is quite clear. BHP Billiton thought they were going
to strike it rich producing shale oil and gas in the United States.
Unfortunately, the shale oil and gas industry has been a dismal
failure as no one really made any money producing it. Sure, a
few companies may have made some profits, but the energy industry as
a whole spent more money drilling and producing shale oil and gas
than they made from operating cash. Thus, they have added a
great deal of debt to their balance sheets.

So,
no…. we can’t blame BHP Billiton for not being able to make money
producing shale oil and gas just because their expertise is more
focused on mining. Again, NO ONE really made any money
producing shale oil and gas in the United States. This is why
the U.S. oil and gas industry is now staring at a HUGE DEBT WALL to
become due over the next several years:

Andrew
Mackenzie, BHP chief executive, said on Tuesday he was willing to
sell its US shale business, as he prepared to meet Elliott Advisors
for the first time since the activist investor called for a major
restructuring of the world’s largest mining company by market
capitalisation.

Elliott
said last month that BHP should spin off its US petroleum business,
which includes onshore shale assets as well as fields in the Gulf of
Mexico, and
the hedge fund also called on the Anglo-Australian company to
simplify its corporate structure.

“If
there is a natural owner out there who believes in more upside that
can be achieved within this shale business than we do, we will be
more than happy to talk turkey with them,” he added.

The
important sentence in the article above is where BHP
CEO, Mackenzie states, “If there is a natural owner out there who
believes in more upside that can be achieved within this shale
business than we do, we will be more than happy to talk turkey with
them.”
That is quite an amusing thing for the BHP CEO to say.

Why?
Because there really isn’t much upside for U.S. shale oil and gas
going forward. Also, it was quite interesting that Elliot
Management, activist investor with 4.1% stake in BHP Billiton, wants
the company to TOTALLY DIVEST itself from all Petroleum assets in the
United States, not just the shale energy assets. This includes
their Gulf of Mexico oil and gas assets as well.

I
believe any company that purchases BHP’s shale energy assets is in
for serious trouble. Unless they are able to acquire BHP’s
shale energy assets for a large discount and then sell them for a
profit to some other poor slob, it would be a big mistake to try and
make money producing shale oil and gas from these assets.

While
some companies are claiming that they can produce oil in the Permian
for $30 a barrel, they seem to forget the massive amount of debt they
have acquired on their balance sheets in producing shale for the past
several years. Also, breaking even at $30 or $40 a barrel is
not a good investment, especially when the industry is saddled with
debt and paying upwards of 75% of its operating income to service it:

Please
stay tuned as I will be posting my interview with Chris Martenson at
PeakProsperity.com when they release it this week.